The IPO to End All IPOs?

$10 trillion. That’s the top-end estimate for how much Saudi Aramco, the world’s biggest oil company, could be worth when shares in the energy giant finally go on sale, perhaps later this year.

Riyadh’s decision to publicly list a slice of its flagship energy company underscores how the plunge in oil prices is driving the kingdom’s new leadership to accelerate much-needed reforms to an economy still overwhelmingly reliant on crude exports.

Listing even part of the behemoth firm on the stock market would be a signal change for the insular Saudi economy, but by itself would do little to address the fundamental issues that dog the kingdom’s efforts to find jobs for a burgeoning population with few real opportunities at home.

Saudi Deputy Crown Prince Mohammed bin Salman floated the suggestion of a stock market listing for part of Aramco in an interview last week with the Economist. The oil giant later confirmed that it is studying selling off a small portion of either the main company or smaller but valuable units that refine and process oil and natural gas into products such as fuel, plastics, and chemicals. It’s unclear whether the listing would be on the small Saudi market or on a larger foreign stock exchange.

Aramco, which began life in the 1930s as a concession of present-day Chevron before eventually morphing half a century later into the wholly government-owned Saudi Arabian Oil Co., controls about 15 percent of the world’s known oil reserves, dwarfing private-sector rivals like Exxon Mobil. Aramco pumps about 10 million barrels of oil a day, more than the whole of the United States. Estimates of Aramco’s real value range from about $1 trillion to as much as $10 trillion. Exxon, the largest publicly traded oil firm, has a market value of about $310 billion.

Low oil prices over the past 18 months have hammered government revenues in Saudi Arabia, forcing leadership to dip into currency reserves and run a budget deficit this year and trimming once-heady economic growth to an estimated 2.4 percent this year. Cheap oil is due to a global glut of the stuff, caused in no small part by Saudi Arabia’s unwillingness to curtail oil production. But the oil-price plunge is forcing King Salman to accelerate the opening of the Saudi economy in a bid to diversify beyond pumping and exporting oil.

Last summer, the Saudi stock exchange opened to foreign investors for the first time. Last fall, Saudi officials broached opening the retail sector to full foreign participation. To increase efficiency and productivity, the government is winding down juicy subsidies for fuels, like gasoline, that many citizens see as a birthright but that cost national coffers billions of dollars a year. At the end of 2015, the Saudi Finance Ministry said it was preparing measures to diversify the economy and in particular to bolster the private sector. Consultants, led by the McKinsey Global Institute, have drafted blueprints for a Saudi economic renaissance that would help the kingdom reduce its reliance on oil and double its GDP.

“The idea of an Aramco listing didn’t come out of left field,” said James B. Smith, former U.S. ambassador to Saudi Arabia from 2009 to 2013. The Saudi leadership, he said, has sought since the Arab Spring to jump-start economic development by strengthening the private sector.

“King Salman spent the last years of [former King] Abdullah’s reign looking at how to transform the economy,” Smith said. That push has only gained pace under the new leadership. While Saudi Arabia has enjoyed 15 years of growth and rising incomes since the beginning of the century on the back of high oil prices, oil income won’t suffice to maintain rising living standards for a growing population in years to come, especially with oil prices in the doldrums.

“They’re aware they have to develop the private sector, because that’s where job creation is,” Smith said.

Unemployment among citizens in Saudi Arabia is about 12 percent, and a youth boom means millions of new jobs will be needed to keep that from growing. The country also needs to revitalize the private sector beyond the big construction firms that dominate it today and are dependent on oil-fueled government revenues.

It’s still unclear just what bits of Aramco might be offered for sale to investors. Aramco said in its statement that it is studying a public listing of some of Aramco’s shares “and/or” a listing of so-called downstream assets, which include oil refineries and petrochemical plants. Media reports suggested that the Saudis are indeed inclined to sell off a portion of those refining and chemical units, as the kingdom has done before with other companies.

Sabic, a state-owned petrochemical company, was partially privatized in 1984. It’s now the world’s third-largest diversified chemical company. Another petrochemical project, Petro Rabigh, is a joint venture between Aramco and Sumitomo Chemical that was listed on the stock market in 2008. McKinsey, like The Graduate‘s Mr. McGuire, is bullish on the future of plastics and other petrochemical products as a way to turn raw crude-oil wealth into economic growth and employment in Saudi Arabia.

Still, Aramco officials, aware of how keenly the world would like to get its hands on even a fraction of the 260 billion barrels of oil it controls, have hinted that the company’s iconic production business could be part of the public listing. Aramco Chairman Khalid al-Falih told the Wall Street Journal that the listing “will include upstream” assets such as oil exploration and production, the heart of Aramco’s business.

It won’t be an easy listing, in any event. The sheer size of any Aramco spinoff could dwarf other listings on the small Saudi stock exchange; the total value of shares traded there is about $400 billion, just a fraction of the size of world-class bourses like London (north of $6 trillion) or New York (almost $20 trillion).

But seeking to list Aramco or its affiliates on a foreign stock exchange could also require Saudi Arabia to disclose to potential investors a lot more information — including closely held information about the true size and state of Aramco’s oil reserves — than it has ever wanted to make public.

Photo credit: FRANCIS H. ANDRUS/Flickr